Q3 2023 Lazydays Holdings Inc Earnings Call

Participants

Kelly Porter; CFO; Lazydays Holdings, Inc.

John North; CEO; Lazydays Holdings, Inc.

Amber Dillard; VP, Supply Chain; Lazydays Holdings, Inc.

Daniel Moore; Analyst; CJS Securities, Inc.

Mike Swartz; Analyst; Truist Securities, Inc.

Presentation

Operator

Greetings, and welcome to the Lazydays Holdings' third quarter 2023 conference call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Porter, Chief Financial Officer. Thank you. You may begin.

Kelly Porter

Good morning, everyone, and thank you for joining us. On the call with me today are John North, CEO; and Amber Dillard, VP of Supply Chain.
Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks, uncertainties, assumptions, and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our website.
Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and any or all of our forward-looking statements may prove to be inaccurate. We can make no guarantees about our future performance, and we undertake no obligation to update or revise our forward-looking statements.
On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures.
With that, I'd like to turn the call over to John North, our Chief Executive Officer.

John North

Thanks, Kelly. Hello, everyone. I want to thank you first for taking interest in our company and reviewing our call today. I'll make some brief opening remarks. Kelly will take you through our financial results, and then we'll open it up for a few questions.
Obviously, the third quarter was a difficult one and our financial results are disappointing to me and our team. Since I joined the company just over a year ago, we have been working diligently on four main strategic initiatives. First, to be relentless in our execution and efficiencies; second, to aspire to be the partner of choice with our OEMs; third, to act like an owner and allocate capital responsibly and with a long-term mindset; and finally, to grow and leverage our infrastructure to deliver above average metrics and superior return on invested capital. While the ultimate barometer of success lies in our financial performance, I am pleased that we have continued to make considerable progress against all four initiatives.
First, the speak to execution and efficiencies. Our inventory remains healthy, thanks to our team's relentless focus and hard work. We have around [100 in 2022] model units remaining and 47% of our overall inventory is model-year 2024. We have reduced our new unit days' supply from 250 units at the end of last year to 171 this year and have intensified our used inventory procurement efforts more than doubling our previous record in both the months of September and October.
We have been removing cost from the organization. We have eliminated all unnecessary overhead, pre-negotiated with key vendors and switch to lower cost providers in other situations and made the difficult decisions around reducing headcount and modifying pay plans in our stores.
As a result, our overall SG&A is down over 13% in the third quarter despite the addition of five new locations since the same quarter last year. With that said, we'll still remain vigilant and laser focused on matching our overhead with what the market gives us even if it means further changes.
As our second objective, we continue to strive to be the partner of choice with our OEMs. We have completed three acquisitions and opened three greenfields year to date and have more growth on the horizon. To that end, last month we announced the rights offering to raise an additional $100 million in equity capital for growth. These rights are issued to our existing shareholders and allow each of you to participate equally to maintain your current ownership percentage. They also allow an oversubscription right where you can contribute more capital, if not every shareholder chooses to participate.
The upside of the current operating environment is both the quality and quantity of acquisition opportunities available. We see both individual locations and multi-store platforms actively being marketed and believe many other locations may become available over the next few quarters.
Coming off the windfall COVID profits generated in 2020 and 2021, many independent dealers are reaching the end of their patients or their careers and need a monetization event. To size the opportunity, we believe over $600 million of acquisition revenue could be generated through the capital we will raise and deploy in the near term.
As a housekeeping matter, we would encourage you to contact your broker or Broadridge if you need more information as the window to make an election expires on November 14. On behalf of the entire management team, we want to thank you for your trust, and we'll endeavor with maximum effort to deliver a compelling return on the money we are raising.
In pursuit of our third objective. We have invested significant capital in our existing facilities to make them fit for purpose and have scale and to ensure they provide our customers and employees a peerless experience. As I've previously discussed, we endeavor to own our relocations and successfully obtained long-term mortgage financing on a number of them over the summer. We believe that an owner's mindset with actions taken for 10 years from now versus 10 weeks from now will create significant value for our shareholders over time.
And for our fourth and final initiative, we have continued to optimize and grow the organization through the current operating environment and industry dynamics. We have been steadily improving our infrastructure, particularly in our technology and marketing departments. While these are not changes that are immediately apparent externally, we believe they will result in significant improvements to our sales -- scale and abilities.
In closing, I again want to thank our team. They come to work each day with a singular mission to provide the best sales and service experience in the industry. Time and again, I'm impressed by their dedication and wherewithal. I sincerely thank all of you, our fantastic employees.
With that, I'll turn the call over to Kelly to take you through the financials.

Kelly Porter

Thank you, John. Please note that unless stated otherwise the 2023 third quarter comparisons are versus the same period in 2022. Total revenue for the quarter was $280.7 million, a decrease of 15.9%. From this point on, all metrics will be on a same-store basis unless stated otherwise. New unit sales declined 20.7% in the quarter and gross profit per unit, excluding LIFO, declined 36.7%. Compared to the second quarter of 2023, new unit sales declined 8.3% and gross profit per unit decreased 26.8% to $9,323 per unit as the model year 2024 inventory began to roll out.
Used unit sales, excluding wholesale units, declined 17.6% and gross profit per unit declined 15.6%. Compared to the second quarter of 2023, used unit sales decreased 22.5% and gross profit per unit decreased 3.2% to $13,135 per unit.
Finance and insurance revenue declined 19.7% during the quarter, primarily due to lower unit volume as F&I per unit was flat year over year at $4,988. Our service, body, and parts revenues decreased 8.8% and our gross profit decreased by 6.9%. Our gross margin on service, body, and parts increased 100 basis points. We continue to evaluate and modify our cost structure to drive performance and adjust with fluctuations in volume and gross profit.
Total SG&A as a percentage of gross profit in the quarter was 84.5%, excluding the impact of LIFO and adjusted SG&A for the quarter was 82.1%. Adjusted net loss was $2.9 million for the quarter compared to net income of $14.4 million last year. Adjusted fully diluted earnings per share was a loss of $0.29 for the quarter compared to net income per diluted share of $0.54 in the prior year.
Moving on to liquidity and capital allocation, as of September 30, we had cash and cash equivalents of $32.9 million with $30.2 million of immediate availability on our new and used floorplan line as well as $4.6 million available on our revolving line of credit. We also had approximately $95 million of unfinanced real estate that we estimate could provide $80 million of additional liquidity. At quarter end, we were in compliance with all debt covenants.
As John mentioned, this quarter's results were challenging and as a result, we recorded a net loss for the third quarter and by extension for the year to date. In times like these, the most important metric to pay attention to is operational cash flow to ensure we remain positive.
For the third quarter, our operational cash flow was nearly $5 million and year to date it is nearly $7 million. This includes the impact of growing our used inventory more than $35 million this year, but funding only $15 million through floorplan financing. Taking this into account, we have generated more than $20 million of operational cash flow year to date.
The reduction in our liquidity and cash position year to date is a function of capital deployed for both acquisitions and for capital expenditures to improve our existing store base and improve the health and size of our core. This is a lever that we can adjust to respond to market conditions, both accelerating our capital allocations as things normalize or making the decision to slow our expenditures if we see further deterioration.
We are continuing to closely monitor our operational performance and will see continued improvement in our cost structure as we made significant changes intra-quarter that will result in additional savings in the fourth quarter.
Finally, an additional reminder that the subscription period for our previously announced rights offering is currently open and scheduled to expire November 14. Assuming the offering is fully subscribed, we will raise an additional $100 million in equity capital that will fortify our balance sheet until we elect to deploy it for acquisitions as the opportunities and market conditions allow.
With that, we can open the call to questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Daniel Moore, CJS Securities.

Daniel Moore

Thanks, John, Kelly, for taking the questions. Got a couple. I guess first, maybe just talk high level about trends in retail traffic and demand through the quarter then to fiscal Q4. Obviously, we're getting into the seasonal softer periods. So maybe if you can delineate between seasonality and just kind of general second derivative rate of change.

John North

Sure. Good morning, Dan. Nice to hear from you. The quarter was pretty consistent. We saw pretty similar unit deliveries each month. I think the interesting or maybe differentiated thing about our business is just our concentration in southern locales, in particular, Florida, Arizona, where we've got larger presence. And so as we move into the winter, we typically see a bit of a shoulder season in October and then things tend to start to pick up in November and December, and then particularly into Q1.
So it's a little bit different maybe than the broader US because we tend to skew a bit more in the Sunbelt. October traffic was down relative to what we saw in the third quarter, whether that's our execution or a broader trend remains to be seen. But obviously, as we move into November and December, we expect to see that pick back up.

Daniel Moore

Very helpful. And I appreciate the color on inventories, destocking. If you can maybe delineate between higher end motorized and fifth wheels and lower-end travel trailers. Are both closer to where you want to be from an inventory perspective at this stage?

Amber Dillard

This is Amber. From an inventory perspective, we've continued to work on our destocking to get down the regulated inventory level. Obviously, a lot of that does come on the higher ASPs and the higher end motorized unit. Still certainly a demand for those. But we do believe we're in a healthier inventory position and will continue to head into the next model year, poised to take advantage of them.

John North

In terms of the relative mix, I think we've been focusing obviously on the lower end as well. So we've got some good relationships and we're putting some entry-level travel trailers into a lot of our stores. We've got a couple of hundred units coming at the low end that we're going to be pushing into the marketplace. I think affordability is a theme that's generally talked about across this segment and particularly with some of our competitors. And I think we agree with that as well.
Ultimately a lot of our buyers are payment buyers. And so if we can find ways to credit -- support that and to bring some entry-level product into the portfolio, I think that's been helpful. We've seen that also with a lot of our OEM partners. So they've been introducing models that are at a lower level and more affordable, introducing some product that might be single axle, $15,000 to $20,000 ASPs. And that's been something we've been trying to lean into.
I think the very high-end motorized and towables, the demand's been pretty consistent. And I think those consumers are less affected. I think where we've really seen a bit of an air pocket, if you will, is just around some of the product that's in the middle. Those are the consumers that are still payment buyers and are certainly feeling a bit more pressure. But overall, we're pretty pleased with what we've done with our inventory. And you can see that in our days' supply, which is obviously significantly improved from where we were at year end.

Daniel Moore

Very helpful. John, and appreciate the color on the TAM and the opportunity from the capital, you would be raising. The $600 million revenue you quoted, I assume that is sort of a steady state figure and just kind of remind us what's your definition of steady-state in terms of shipments or any other metric, you'd want to give.

John North

Yeah. I think in general, the way we model our acquisitions for the five-year kind of timeline, we certainly are looking to buy dealerships that we could -- that we can improve. And the three dealerships we bought year to date are all profitable. So I'm very pleased with what we've added to our portfolio in terms of their initial contribution to our organization. But none of them are really performing to where we think they can be. And that is really giving us time to ramp up and build, obviously the consumer base. And then importantly, a lot of our OEM partners are interested in coming along with us as we go into our market.
So as an example, we bought Las Vegas in February and we're able to add Tiffin, which was not part of that dealerships mix prior to us acquiring it. And so that goes back to our second strategic initiative, which is really to be the OEMs partner of choice. And I think what we believe and part of what Lazydays has stood for even prior to me joining, was really to have an amazing relationship with our OEM partners. And so in many cases, we believe that there are acquisitions that will come that we can add brands to or we can add lines to from our OEMs because they want to partner with us. And so in many cases, that allows us to ramp revenue.
In terms of the $600 million, I mean that's probably a year three view. And obviously, I'm not smart enough to tell you what 2024 is going to look like. Are we going to see an up year, or flat year, or down here? I mean, who knows? We only think about 90 to 120 days out because that's really the inventory that we're managing to.
But our assumptions are in a normalized market, if we buy these locations, we think it could be plus $600 million or more. It's not an insignificant revenue number and at a normalized contribution margin, that's a pretty attractive EBITDA or pretax income number relative to $100 million we're raising.

Daniel Moore

Very helpful. Last question for me. Apologize if it's long-winded, but just focusing on gross margins a little bit, obviously saw some pressure in the quarter, particularly on new unit sales. How much of that was mix and desire to clear out older inventory versus maybe a more strategic decision to focus less on gross margin from new units and more on longer-term opportunities been used in maintenance and repair? Just trying to get a sense for if this was temporary decline or closer to sort of the new norm for at least the near term in terms of margins on new unit sales? Thanks again for the color.

John North

It's an astute question. Appreciate it. I think it's both. We certainly are being very attentive to the 2023 model year. And like last year, as you see the model year changeover, which typically happens sort of April to July, you start to see some compression on those margins. And it's a very competitive industry dynamic right now because I think other private dealers have probably been less attentive in terms of 2022 and 2023. And so they're feeling more acute pressure.
And if someone's advertising a similar unit with the same floorplan at 40% off, it's hard for us to not match that. And so that's a dynamic, I think, that's happening. In terms of real-time color, in October, our margins actually improved. The health of our inventory is really good. And as you get more of the deliveries in the 2024 model, you're seeing still similar attractive gross margins.
And so I think some of what we saw in the third quarter was transitory. That pressure probably continues and even accelerates, which is what we saw last year. But it's on a smaller percentage of the overall mix and so it's less relevant. And I think that's probably the larger piece of the trend.
But importantly, and I think you're exactly right, what I observed in the last 25 years in automotive is a secular decline in front end growth. And what that meant was you needed to prioritize F&I service and used taken in trades and trying to accelerate that.
And really thinking about the velocity of capital, and that's been a big message we've talked to our general managers about. I would rather sell something in 60 days for a smaller front end than to try to hold out for the really big gross margin. And then it up with a couple of more units that are age that you have to discount aggressively to get rid of.
And so we're very focused on the velocity of capital and the gross margin return on investment that comes from accelerating turns. The flip side of that is we need to then drive F&I performance up, which should be plus or minus 10% of your average selling price. And I think in the quarter, we were at 5%. So the biggest opportunity for us is to really focus on F&I and the used opportunity that comes from the trades as we accelerate the velocity of new. And that's been a pretty consistent message internally. I wouldn't say we hit our stride in the third quarter, but it's a focus area for us.

Daniel Moore

Okay. Appreciate the color again. Thank you.

Operator

(Operator Instructions)
Mike Swartz, Truist Securities.

Mike Swartz

Hey, John, Kelly, good morning. I just hopped on the call a little late, so I apologize if I'm asking a question the second time. But just in terms of the new vehicle margins, can you give us any color maybe how that played out through the quarter? Maybe what the exit rate was coming out of the quarter?

John North

Sure. Nice to hear from you, Mike. I think as it was intra-quarter, what we saw is the 2023 is really toggled over. So, most of our total product tends to flip in like July, and you start to really see the '24's come online from a industry dynamic. As I mentioned a moment ago, a lot of our competitors have been aggressively discounting 2023's. And if you go online and look, you can see many of them are 35% to 40% off, which is pretty close to cost in many cases.
And so what you're really focusing on as you turn those units are, what's the trade opportunity? What's the F&I opportunity? What's your documentation fee? What can you do to try to -- to make a little bit of money and get those turned. And so as we progress through the third quarter, I would say we were very aggressive in terms of discounting those and trying to turn up.
As we mentioned in Kelly's prepared remarks, 47% of our inventory is 2024's. So we're in really good shape. The 2023's that we have are a mix between both towable and motorized. And the motorized, in particular the season and some of those are very scarce and so you're still seeing pretty good margin on those. But I think overall, we've been very focused on maintaining the health of inventory versus maintaining the health of gross. And I'm pleased with where we stood and our days' supply has come down a bunch.
Relative to October, our margins have actually gotten better. They're up, and that's because more of the mix is 2024's now. And it's -- half our inventory is that model year, you're going to see that improve. And we were early to the party last year, for lack of a better term, in terms of discounting 2022's. That was a big focus of what we were working on in Q3, Q4 last year.
And what you saw, I think in Q1 and Q2 was really healthy margins because we were through the '22's and working on the '23's. And I feel like we're set up in a similar fashion for next year. So my expectation is you'll see a slightly higher margin in Q4. I don't think it's going to be dramatically stronger than where we ended Q3. But I think it will be up. And I think as we fall into next year, you're going to see that continue. And you can see some nice margin for the next couple of quarters because we're in better shape than probably the industry is, generally speaking.

Mike Swartz

Okay. Thanks so much for the color, John. Just a second question on -- I'm just trying to kind of net out the impact from things -- several of the acquisitions you've announced with some of the store closures. I know you've got another greenfield location opening this year. But as I take that all together, what is the -- what do you think the annualized impact is on revenue?

John North

Well, I think in terms of the acquisitions we've done, they're probably worth $125 million. So that's three stores. You've got four greenfields opening this year, and that's probably worth another $125 million, I would say. And then we closed two locations. One was taken through eminent domain by the Tennessee Department of Transportation, and one was consolidation into our sister's store, that's about an hour away in Elkhart. We closed a store in Indiana and consolidate those brands. Those were smaller locations. They were probably $50 million to $60 million annualized. And I think our belief is that some percentage of that revenue should shift to other stores in the market?
I'm not sure it's dollar for dollar amount. I might give a $0.5 in $1, something like that. So I think, let's call it $250 million of growth and then let's call it $50 million of closure and maybe $25 million of that should still remain in Lazydays' portfolio. So rough justice is $275 million. And then in a year or later into that, plus or minus 15%, 20% decline in just the overall market. And obviously we've lost some share relative to the competition, but we don't dabble in the -- super low end, isn't where we are. And I would say that's where most of the market growth has been happening.

Mike Swartz

Okay. Awesome. To clarify those numbers you were giving were steady state normalized industry demand type numbers; not necessarily what we'll see in '24?

John North

Yeah. I mean, I'm not that smart. I wish I could tell you what next year's going to look like. You tell me. I think what we're trying to do is say in a normalized 450,000-unit year, what should our stores do, what's our expectation be? And that's how we size it. Where we go in March of 2024 is -- your guess is probably better than mine.

Mike Swartz

Okay, that's great. Thanks, John.

Operator

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to John North for any closing comments.

John North

Thanks for joining us today. We'll talk to you guys next year.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.